Banking inquiry: Banks ‘lobbied for longer guarantee’

The government considered a bank guarantee lasting just six months from September 2008 but extended this to two years following lobbying by AIB and Bank of Ireland (B of I) on the night the decision was made , former attorney general Paul Gallagher told the Oireachtas banking inquiry today.

“The Taoiseach (Brian Cowen)and the minister (for finance Brian Lenihan) very carefully considered the option of providing a much shorter guarantee,” he said. “They specifically considered the possibility of providing for the termination of the guarantee by giving six months notice.

“The banks, however, made clear their belief that anything short of a two-year guarantee would not have the desired effect.”

Mr Gallagher said the government also considered deferring this crucial policy decision until after a meeting of the European Central Bank (ECB) on October 1st 2008 but the situation was deemed to be so grave on the night of the guarantee on September 29th that it chose to press ahead.

“(Central Bank) governor (John) Hurley and the Financial Regulator made it clear that this was not an option and that decisive action needed to be taken immediately,” he said.

“The liquidity problem was not only real but enormous and if not addressed would, in their view, have devastating consequences for the economy.”

He said ex-governor Hurley had warned that the Irish economy could be set back by 25 years if decisive action was not taken on the night.

Mr Gallagher said AIB and B of I had wanted Anglo Irish Bank and Irish Nationwide Building Society to be nationalised on the night of the guarantee.

The former AG said B of I also favoured the inclusion of dated subordinated debt in the guarantee but concern was expressed about this by Mr Hurley and officials of the department of finance.

‘Stood alone’

Mr Gallagher was AG from 2007 to 2011. He said that two and a half years of this period involved an “unprecedented financial and economic crisis”.

“A defining feature was that Ireland truly stood alone throughout this period,” he added.

He said that while there was “sympathy and goodwill” within the EU for Ireland’s difficulties at the time, the country “had to rely on its own resources to find a solution to the crisis”.

His “abiding memory” of the period from late 2008 was of the “sense of Ireland’s isolation”. It was required to save the Irish banks by using “our own resources”.

His appearance at the committee was facilitated by the Government’s decision to waive legal privilege.

Mr Gallagher said he wrote to Mr Lenihan to state that he could include a provision to burn bondholders but this was “forbidden” by the Troika. Deposit holders would have been protected in this legislation, he said.

He said the austerity that flowed from the decisions of late 2008 were a “terrible and unfortunate consequence” and you could only be “horrified by that occurring”.

But he said the government’s motivation at the time was about “saving the financial system” for the benefit of economy.

Mr Gallagher said that from November 2007, a number of measures were considered by the department of finance to deal with a possible financial crisis.

These included the possibility of nationalisation of a failing institution and a “private sector solution” so that the taxpayer would not be at risk.

‘Obstacle’

Mr Gallagher rejected the suggestion that he was not independent during his time as AG to the Fianna Fail-Green Party government.

In a book about the Green Party’s time in government from 2007 to 2011, former senator Dan Boyle described Mr Gallagher as an “obstacle” at cabinet level.

“I’m certain that I was not so viewed,” Mr Gallagher said in response to a question from Fine Gael’s John Paul Phelan on the remarks.

Mr Gallagher said he took the “gravest exception” to this remark and he had been assured by former Green ministers John Gormley and Eamon Ryan that this was not their view of him.

“I prided above all else my independence,” he said. “I had no political connection and have no political connection. I was never a member of a party and I never knew what constituency a member of the government was from.”

Mr Gallagher also revealed that “very considerable pressure” was placed on Ireland during the bailout negotiations in late 2010 by other euro zone countries to raise the 12.5 per cent corporate tax rate.

He said the view of the government was that to raise the corporate tax rate would have undermined the chances of an economic recovery.

“We were absolutely entitled to maintain it under the treaty. They couldn’t affect it but people saw (the bailout talks) as an opportunity (to change the tax rate).”

Mr Gallagher also praised the late minister for finance Brian Lenihan for his determination to push through the necessary legislation around the Troika bailout for in spite of his battle with cancer at the time.

Mr Gallagher detailed a meeting in the Merrion Hotel on December 23rd 2010.

“Here was a man under the stress and the clear knowledge of what the future had for him and there was only one thing that concerned him and that was making sure that the legislation that was required to meet the bailout obligations was enacted before the government fell,” he said.

“That was the only thing that was on his mind. Subsequent to that, I wrote to the taoiseach and copied it to the cabinet and asked that I get every assistance from all of the departments to prepare for the incoming government the legislation that was required.”

Mr Lenihan died in June 2011 aged 52 after a battle with pancreatic cancer.